The European Central Bank followed the NY Fed in exposing stablecoin destruction of bank credit. The timing of the reports suggests a coordination among the two central banks. In a document issued March 3, the ECB studied “the effects of stablecoin adoption—crypto-assets designed to maintain a stable value relative to a reference asset—on bank intermediation and the transmission of monetary policy,” to conclude that “First, stablecoin adoption induces a deposit-substitution mechanism, whereby funds shift from retail bank deposits to digital assets. This reallocation increases banks’ reliance on wholesale funding and can ultimately constrain their intermediation capacity.”
“How do stablecoins affect banks? The first key finding is that growing use of stablecoins can lead people and firms to move money out of traditional bank deposits and into digital assets. Banks rely heavily on deposits as a stable and low-cost source of funding to support lending to households and businesses. When deposits decline, banks may be forced to rely more on wholesale or market-based funding, which is typically more expensive and less stable. Our analysis shows that increasing interest in and attention toward stablecoins are associated with a measurable decline in retail bank deposits and a reduction in bank lending to firms. In other words, stablecoins can reduce the amount of credit banks provide to the real economy. Importantly, these effects are nonlinear and depend critically on the scale of stablecoin adoption, their design features, and their regulatory treatment.”
“Second, we show that stablecoins alter the passthrough of policy rates to bank funding costs and lending conditions and potentially weaken the predictability of policy actions. These effects are nonlinear and depend critically on the scale of stablecoin adoption, their design features, and their regulatory treatment.”
“Third, we document a potential risk associated with the growing prevalence of foreign-currency-denominated stablecoins. Their diffusion is likely to increase banks’ reliance on foreign-currency wholesale funding. We show that banks with greater exposure to this source of funding exhibit a weaker loan-supply response to domestic monetary policy shocks, indicating a weakening of monetary policy transmission and a potential erosion of monetary sovereignty.”
The ECB speaking of monetary sovereignty and real economy is a bad joke, but even a broken clock is right twice a day. This is the case with the warning on the threat to “bank intermediation.” On the subject, this is what we wrote in this week’s EIR Strategic Alert :
